Entry into U.S. Banking Markets: Dimensions and Implications of the Charter Process

• Author: Peter S. Rose
• Published date: 01 March 1980
• Date: 01 March 1980
• DOI: http://doi.org/10.1177/0003603X8002500106
• Subject Matter: Article

The

Antitrust

Bulletin/Spring 1980

Entry into U

.8.

banking markets:

dimensions and implications

of

the charter process

BY

PETER

S. ROSE*

195

Entry into the commercial banking industry is strictly controlled by

both federal and state authorities and has been so treated since the

Banking Act of 1935. Only the banking commissions of the 50 states

and the Comptroller

of

the Currency can issue a charter for a new

bank, though the Federal Deposit Insurance Corporation has quasi-

chartering authority since, in all

but

a few states, bank charters are

granted conditionally upon the receipt of deposit insurance. Gener-

ally, a charter will be granted only if: (1) the prospects are favorable

that the bank will be reasonably profitable in the near-term (usually

about three years); (2) there is a demonstrated "public

need"

for a

new bank; (3) management seems experienced

and

capable; (4) ade-

quate equity capital is pledged; and(5) all federal and state laws that

apply to the business

of

banking are fully complied with. This com-

mentary attempts to fill a large gap in the existing literature by

providing new information and an analysis of bank charter activity

not previously available from any published source. Inaddition, the

study looks at

the

basic determinants of charter activity in all 50

states during a recent three-year period.

*Professor of Finance, Texas A&M University.

1980 hv Federal l.cual Publicationv,

Inc

196

The antitrust bulletin

The process of securing a U.S. bank charter is expensive,

time-consuming, and often bitterly fought by banks established

in the local market. The elaborate rules for securing a commer-

cial bank charter are justified on the grounds that: (1) the public

is more conveniently served; and (2) the constraints result in

more solvent banks because

"ruinous"

competition is avoided. I

The benefits

of

competition are subordinated to an undeter-

mined extent in order to achieve a more stable banking system,

while insuring a reasonable volume and quality

of

banking serv-

ices.' Restrictions on new bank entry substitute the judgment

of

chartering agencies for

"the

judgement of private entrepreneurs

who desire to risk their capital in a banking venture." 3Unfor-

tunately, these restrictions reduce both actual and potential

competition and, in the U.S. at least, have eliminated neither

failures nor unsound banking practices. 4

Peltzman in his path-breaking article on the effects

of

entry

regulation argues that:

"the

prime justification for bank entry restric-

tion becomes clear by noting the date

of

its

adoption-1935;

it was

designed to prevent a repetition

of

the collapse

of

the banking system

such as had taken place in the early 1930's. . . . Bank entry restric-

tion was designed to

...

[insure] against a high rate of failure." See,

in particular, Sam Peltzman,

"Bank

Entry Regulation," National

Banking Review, III,

No.2

(1965), 172.

2See especially David A. Alhadeff,

"A

Reconsideration

of

Restric-

tions on Bank

Entry,"

Quarterly Journal

of

Economics, LXXVI

(1962), 246-263; and A. Dale Tussing,

"The

Case for Bank Failure,"

Journal

of

Law and Economics, X (1967), 129-147.

3See Alan S. McCall and Manferd O. Peterson,

"The

Impact of

De Novo Commercial Bank

Entry,"

Federal Deposit Insurance Cor-

poration Working Paper No. 76-7, reprinted in Compendium

of

Issues

Relating to Branching by Financial Institutions, U.S. Senate Subcom-

mittee on Financial Institutions, October 1976, pp. 499-521, especially

p.5OO.

4

It

is unlikely that bank entry restrictions will be lifted any time

soon by either federal or state regulatory agencies. More likely is a

relaxation

of

restraints on competition through wider use

of

branching

and electronic banking and by granting near-banks (especially credit

unions and savings and loan associations) the power to offer many

traditional banking services, such as the share draft privileges granted